Question

What are three classifications of ratios and which specific ratios fall into each classifications? Please explain  

What do the different ratios tell us about an organization? Please explain

Which ratio do you think is most important? How would you use this ratio? Please Explain

Answer 1

Answer(1):

Financial Ratios- These are the quantitative representation of company's financial position. Ratio tells the relationship between two amounts. Ratios are the parameters of comparison between two companies' financial position.

Classifications of ratios- Are as following:

Profitability ratios- These ratios tell the profitability of the company. These ratios are as following:

• Gross profit margin
• Operating profit margin
• Net profit margin
• Return on equity
• Return on capital employed

Liquidity ratios- These ratios tells how much a company is liquid. These are:

• Current ratio
• Quick ratio
• Cash ratio

Turnover (Activity) ratios- These ratios tell how efficiently company's assets are being used to generate sales and profit. These are:

• Total asset turnover
• Fixed asset turnover
• Account receivable turnover
• Inventory turnover

Answer(2): Different ratios tell us about an organization-

1. Profitability ratios tell how much profit company is generating on sales.
2. Turnover ratios tell about the efficiency of company's assets to generate sales and how frequently company converts its inventory into sale and how quickly receives payment from its customers.
3. Leverage ratios tell how much a company is having debt, what is the ratio between the debt and equity and what should be the ideal ratio. It also tells whether the company is in risk or how is its financial position.
4. Liquidity ratios tell about the liquidity of the company, company should have enough cash and cash equivalents, it also tells the area where company having less liquidity.
5. Price relative ratios tell the relationship between earning and price per share, it also compares the book and market value per share of the company.

Answer(3):

Most important ratios- Well all ratios are important but these ratios are most important:

Net profit margin- This tells how much profit company is earning on sales, after paying all the expenditures, interest and taxes.

Net profit margin = Net profit / Net Sales

Debt-equity ratio- Debt equity ratio tells how much debt and equity company has in its capital structure.

Debt-equity ratio = Total liabilities/Shareholder's equity

Current ratio- This ratios tells the liquidity of the company.

Current ratio = Current assets/Current liabilities